JPMorgan UK Smaller Companies 25 April 2023
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by JPMorgan UK Smaller Companies. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
JPMorgan UK Smaller Companies (LON:JMI) is run by two co-managers, Georgina Brittain and Katen Patel, who search the smaller end of the market cap spectrum to find under researched ideas which may offer excellent growth opportunities for the long term. Examples include companies operating in rapidly growing new markets or those creating innovation in, or disruption of, existing industries. The managers primarily focus on an individual company’s fundamentals when assessing its value; however, the market backdrop can often affect these. More recently, they have reduced the trust’s exposure to companies which are reliant on consumer spending, and added to banks and energy companies, which are likely beneficiaries of the inflationary environment (see Portfolio).
The trust has delivered strong long-term Performance, which has been primarily driven by stock selection, aided by the well-resourced team the managers have at their disposal. The managers believe the market has been driven by sentiment over the past year, and not fundamentals, which has been a headwind to relative performance. However, they now believe UK equities are very attractively valued, especially when compared to equities within other developed markets. The managers also highlight that their portfolio is trading with a better free-cash flow yield and return on invested capital metrics than the index.
JMI is trading at a 14.1% Discount, at the time of writing, notably wider than its five-year average. It is also wider than the sector average, despite having one of the best performance records compared to its peer group.
Georgina and Katen have been working together on this trust for nearly ten years and their long-term Performance has been strong, with JMI being one of the best performers in the sector. We believe the quality and stability of the management team is one of the key advantages of this trust. The strength in depth of the analyst team available to the managers should help them to navigate the current choppy markets and take advantage of the valuation opportunities (see Portfolio).
We believe this opportunity is further enhanced by the Discount, which is wider than its five-year average, despite the managers’ track record of delivering alpha and beating the peer group. There are several factors that could lead it to narrowing in the future. First, smaller companies often (but not always) outperform in periods of economic recovery and there are some indications that the climate is stabilising; secondly the UK market is very undervalued when compared to developed market peers which could lead to a spike in M&A; and thirdly, the managers’ stock selection capabilities have led to long-term outperformance in the past.
- Strong long-term performance delivered through stock selection
- Trust is trading at a wider-than-average discount
- Smaller companies could benefit from a pick-up in sentiment about the UK
- Smaller companies often underperform in periods of economic weakness
- Gearing can amplify losses, as well as aid potential upside
- Growth style could struggle in higher interest rate environment